Are palladium stockpiles running out?

In early April, palladium prices attempted a run at the $800-per-ounce level, but were thwarted — quite likely — by the collapse in gold prices. Chart 1 shows that palladium was moving independently, responding to what have become very bullish supply/demand fundamentals. At about the same time that gold peaked at $1,750 per ounce back in October, palladium began a close-to-$200-per-ounce rally that held right up until gold broke below $1,600 per ounce. Palladium could not withstand the winds of liquidation.

Palladium may be rare, but it is not a precious metal, at least not in the same sense that gold is, because its investment sector is negligible. While volatility in gold prices may affect palladium prices in the short term, palladium should not be beholden to the broad precious metals investment climate.

Just about all available palladium supplies are used for industrial purposes. About 70% is used as a catalyst for the exhaust systems of motor vehicles. The balance is used by the jewelry, chemical, and dental industries.

Palladium has taken auto catalyst market share from platinum over the past 10 years. Johnson Matthey (JM) estimates 2012 global platinum auto catalyst demand at just over 3 million ounces. That’s down from the 2007 peak of more than 4 million ounces. Palladium demand during this period, on the other hand, experienced explosive growth. JM estimates 2012 usage at 6.5 million ounces, up from 3.5 million ounces in 2003.

The bullish case, however, is not strictly a demand side issue. The market is absorbing a supply-side shock from two fronts. Roughly 80% of world supplies are mined in two countries, Russia and South Africa.